Blue Ocean Strategy Ch. 6 Get the Strategic Sequence Right Team 4: Brent Hare Ty Parasiliti Josh Fernino Vincent Ukwu Lance Hollister Chris Kerschen Victor Hemmati
Overview The Right Strategic Sequence Testing for Exceptional Utility From Exceptional Utility to Strategic Pricing From Strategic Pricing to Target Costing From Utility, Price, and Cost to Adoption The Blue Ocean Idea (BOI) Index
The Right Strategic Sequence Companies need to build their blue ocean strategy in what is called the Sequence of Blue Ocean Strategy The sequence goes: ◦ ◦ Buyer Utility Price Cost Adoption
Buyer Utility Does your offering unlock exceptional utility? There is no blue ocean potential without this point Options include: ◦ Park the idea ◦ Rethink it ◦ Reach an affirmative answer
Price Companies don’t want to rely solely on price to create demand Is your offering priced to attract the mass of target buyers for a compelling ability to pay for your offering? These first two steps address the revenue side of a company’s business model
Cost Can you produce your offering at the target cost and still earn a healthy profit margin? Don’t let cost drive prices When target costs cannot be met, forgo the idea because the blue ocean will not be profitable
Adoption What are the adoption hurdles in rolling out your idea? Addressing adoption hurdles early on ensures the successful actualization of your idea Because blue ocean strategies represent a big departure from red oceans, it’s key to address adoption hurdles up front These four steps ensure a commercially viable Blue Ocean idea
Testing for exceptional utility Creating Exceptional Value innovation is not the same as technology innovation. Companies are obsessed by novelty of their product or service, especially if new technology plays a part
Getting Around the Trap Starting point: ◦ Create a strategic profile that passes test Of being focused Of being divergent Of compelling taglines that speak to buyers ◦ Create a buyer utility map Helps managers look at things in the right perspective
The Buyer Utility Map
Uncovering Blocks to Buyer Utility This shows how a company can identify the most compelling hot spots to unlock exceptional utility:
Questions to Ask? When testing for exceptional utility ask: ◦ Where are the greatest blocks to utility across the buyer experience cycle for your customers and non customers? ◦ Does your offering effectively eliminate these blocks? When a company’s offering passes this test, it is ready to move to the next step.
From Exceptional Utility to Strategic Pricing • To secure a strong revenue stream for your offering, you have to set the right strategic price. • Many companies may take the reverse course and test the product in different situations before deciding to low their pricing. • It is crucial to know how the company will set its pricing strategy from the start.
The two reasons for change First, companies are discovering that the greater the volume will generate more returns that it use to. e. g. Windows XP, cost billions to make, but the following copies were trivial by just placing them on CD’s
cont. Second, the value of a product or service may be closely related to the total number of people using it e. g. Ebay; no one wants to use a site to buy something when there are not many people involved in the website Free-riding: this relates to the nonrival and partially excludable nature of knowledge e. g. Someone cannot be working at two places at once. Or materials cannot be used by two different places.
Excludability Excludability: a function both of the nature of the good and of the legal system A good is excludable if its protected from the company putting a patent on it Example: Intel and Curves. Intel can exclude their microprocessors but curves can’t exclude someone coming in and studying the layout of their stores.
Pricing Companies have to start at day one finding the right pricing strategy to bring in the customers and retain them over time. Word of mouth is a huge brand building tool. The more a company can make good with their customers, those customers bring in new customers based on their own personal experience.
Price Corridor of the Mass This a tool that has been created to help managers find the right price for an irresistible offer This irresistible offer by the way does not always have to be the lowest labeled price for that particular line of product The tool involves two distinct but interrelated steps
Step 1: Identify Price Corridor How do companies determine a strategic price? ◦ Answer: Understand the price sensitivities of the people who will be comparing your product to many other products in other industries Companies must categorize products that fall into two categories 1. Different form, same function 2. Different form and function, same objective
Step 1: Identify Price Corridor Different form, same function ◦ Example: Ford’s Model T vs. the horse-drawn carriage Different form and function, same objective ◦ Example: Cirque du Soleil vs. restaurant/bar Listing all these alternatives shows managers which buyers can be poached Identify the price bandwidth that captures the largest groups of target buyers: the Price Corridor of the Mass
Step 2: Specify a Price Level How high of a price can managers set within the corridor? They must assess ◦ Degree to which the product is protected legally through patents or copyrights ◦ Degree to which the company owns some exclusive asset or core capability Level of patent and asset protection determines which price bound to choose ◦ Upper ◦ Middle ◦ Lower
Step 2: Specify Price Level Companies should pursue mid- to lowerboundary pricing if: ◦ Their blue ocean has high fixed costs and marginal variable costs ◦ Their attractiveness depends heavily on network externalities ◦ Their cost structure benefits from steep economies of scale and scope
From strategic pricing to Target Costing • • • Target Costing addresses the profit side of the business Model To maximize profit potential a company should start with Strategic Price, then deduct desired profit margin from the price to arrive at Target Cost Price-minus costing, and not cost-plus pricing, is essential if you are to arrive at a cost structure that is both profitable and hard for potential followers to match
From strategic pricing to Target Costing 3 important strategic plans companies use to meet their Target Cost 1. Streamlining Operations and Introducing Cost Innovations 2. Partnering 3. Changing Price Model of the Industry
From strategic pricing to Target Costing Streamlining Operations and Introducing Cost Innovations Can products or service’s raw materials be replaced by less expensive ones? Can high-cost, low-value added activities in your value chain be significantly eliminated? Can pysical location of your product or service be shifted from prime locations to lower-cost locations ?
From strategic pricing to Target Costing Partnering Provides a way for companies to needed capabilities while dropping their cost structure Allows company to leverage other companies expertise and economies of scale Includes gaps in capabilities through making small acquisitions when doing so, makes cost structure faster and cheaper
From strategic pricing to Target Costing Changing Price Model of the Industry Used to make desired profit margin without compromising their strategic price Adapted price with value of actual use of a product or service Prime Example - Blockbuster from Selling to Renting
Profit Model of Blue Ocean Strategy The Strategic Price The Target Profit The Target Cost Streamlining and Cost Innovations Partnering Pricing Innovation
From Utility, Price, and Cost of Adoption Educating the Fearful Perfect business model doesn’t always guarantee success of a blue ocean idea Ultimately threatens the position of the company, which can provoke fear among the three main stakeholders: Employees, business partners, and the public Before moving on with a new idea, the company should communicate the plan
Employees Failure to address the concerns of employees can be very expensive Merrill Lynch Make an effort to explain the new idea Work out the problems so everyone wins Morgan Stanley
Business Partners Possibly more important than employees SAP developed software program ASAP Problems arose from cooperating with consulting firms SAP resolved the issue with their partners by openly discussing the problem
The General Public Opposition of a new product or idea from the public can also be very devastating to a company Monsanto made the mistake of letting others take charge in their own debate Imperative for a company to consider all three groups of stakeholders when evaluating a new idea Stakeholders need to be confident and know that there will be no surprises
Blue Ocean Idea (BOI) Index Philips CD-I Motorola Iridium Do. Co. Mo i-mode Japan Utility Is there exceptional utility? Are there compelling reasons to buy your offering? _ _ + Price Is your price easily accessible to the mass of buyers? _ _ + Cost Does your cost structure meet the target cost? _ _ + Adoption Have you addressed adoption hurdles up front? _ -/+ +
Conclusion The Right Strategic Sequence ◦ ◦ Buyer Utility Price Cost Adoption Testing for Exceptional Utility ◦ Create a strategic profile that passes test, of being focused, of being divergent, and of compelling taglines that speak to buyers ◦ Create a buyer utility map which helps managers look at things in the right perspective From Exceptional Utility to Strategic Pricing
From Strategic Pricing to Target Costing ◦ 3 important strategic plans companies use to meet their Target Cost 1. 2. 3. Streamlining Operations and Introducing Cost Innovations Partnering Changing Price Model of the Industry From Utility, Price, and Cost to Adoption The Blue Ocean Idea (BOI) Index
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